Real options valuation of US federal renewable energy research, development, demonstration, and deployment

✍ Scribed by Afzal S. Siddiqui; Chris Marnay; Ryan H. Wiser

• Publisher: Elsevier Science
• Year: 2007
• Tongue: English
• Weight: 396 KB
• Volume: 35
• Category: Article
• ISSN: 0301-4215
• DOI: 10.1016/j.enpol.2005.11.019

✦ Synopsis

Benefits analysis of US Federal government research, development, demonstration, and deployment (RD 3 ) programmes for renewable energy (RE) technology improvement typically employs a deterministic forecast of the cost and performance of renewable and nonrenewable fuels. The benefits estimate for the programme derives from the difference between two forecasts, with and without the RD 3 programme in place. Three deficiencies of this approach are that it ignores: (1) uncertainty in the cost of non-renewable energy (NRE);

(2) the possibility of adjustment to the RD 3 effort commensurate with the evolving state of the world; and (3) the underlying technical risk associated with RD 3 . In this paper, an intuitive approach to determining the option value of RE RD 3 is developed. This approach seeks to tackle the first two deficiencies noted above by providing an estimate via a compound real option of an RE RD 3 programme in a future with uncertain NRE costs. A binomial lattice reveals the economic intuition underlying the decision-making process, while a numerical example illustrates the option components embedded in a simplified representation of current US Federal RE RD 3 .